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Tax

“Republicans complaining about the households not paying enough who also want to cut taxes overall are asking the poor to subsidize a tax cut for the rich…”

Here’s a fresh quote from the latest non-Romney front-runner in the GOP presidential race: “This dividing of America [between] 99-1,” Rick Santorum said this morning in New Hampshire, “It’s anybody that makes money and pays taxes and everybody who doesn’t. That’s the 99-1.”

Santorum (like Michele Bachmann before him) is picking a fight with the millions of Americans who make money and don’t pay federal income taxes. For the last few years, this group represents about half of the country.

Indeed the statistic inspired a website, “We Are the 53 Percent,” which called out the 47% (or more) of households who owed no federal income tax in 2010 and again in 2011, because their credits and deductions wiped out their liability.

Since 2000, the poorest 40% of households have averaged a federal income tax rate below zero. The graph below shows federal income taxes since 1979, from the lowest quintile (on the bottom) to the top 1% (at the top). The big picture is that we have a progressive tax system where federal income tax rates have fallen slightly for every class of taxpayers:

FEDERAL INCOME TAX RATES

But federal income tax isn’t the only tax out there. In fact, FIT accounts for only 40 percent of total government revenue. Another 40ish percent comes from payroll taxes, which all working families pay up to about $107,000. The rest comes from corporate income taxes and excise taxes on things like gas.

When you add all of those taxes together, you get the overall tax burden that economists call the “effective tax rate.” Here is the graph of effective federal taxes for the same groups as above (it’s a similar story of gradually falling rates for every group, with some jumpiness at the top):

TOTAL EFFECTIVE TAX RATES

Three big points, here. First, the fact that all the lines in the second graph are above zero suggest that the vast majority of households that don’t pay federal income taxes do pay federal taxes. (The few that don’t might still owe local and state taxes.)

Second, the reason most poor families don’t pay federal income taxes is that Republicans and Democrats keep cutting their taxes.

Third, just about everybody has shared in the tax cut parade of the last 30 years. We haven’t shared equally, but we’ve all gotten a break.

According to Santorum’s quote, the most important class division in America is between income tax payers and non-income tax payers. This is a weird fight to pick for the Republican party, and particularly for Santorum, whose tax scheme would probably increase the number of households who owe no federal income tax.

In the war of rhetoric that has developed in Washington as both sides blame each other for our economic mess, one argument has been repeated so often that many people now regard it as fact:

‘Rich people create the jobs.’

Specifically, entrepreneurs and investors, when incented by low taxes, build companies and create millions of jobs.

And these entrepreneurs and investors, therefore, the argument goes, can solve our nation’s huge unemployment problem — if only we cut taxes and regulations so they can be incented to build more companies and create more jobs.

In other words, by even considering raising taxes on “the 1%,” we are considering destroying the very mechanism that makes our economy the strongest and biggest in the world: The incentive for entrepreneurs nd investors to build companies in the hope of getting rich and, in the process, creating millions of jobs.

Now, there have long been many problems with this argument, starting with:

Taxes on rich people (capital gains and income) are, relative to history, low, so raising them would only begin to bring them back in line with prior prosperous periods, and

Dozens of rich entrepreneurs have already gone on record confirming that a modest hike in capital gains and income taxes would not have the slightest impact on their desire to create companies and jobs, given that tax rates are historically low.

So this argument, which many people regard as fact, is already flawed.

But now a super-rich and super-successful American has explained the most important reason the theory is absurd, while calling for higher taxes on himself and people like him.

The most important reason the theory that “rich people create the jobs” is absurd, argues Nick Hanauer, the founder of online advertising company aQuantive, which Microsoft bought for $6.4 billion, is that rich people do not create jobs, even if they found and build companies that eventually employ thousands of people.

What creates the jobs, Hanauer astutely observes, is a healthy economic ecosystem surrounding the company, which starts with the company’s customers.

Business guru and famous super-rich person Warren Buffett made waves last month with an op-ed in The New York Times, “Stop Coddling the Super-Rich,” calling for higher taxes for him and other obscenely wealthy Americans. He argued that the nation’s very well-off are not sacrificing enough in these hard times and enjoying a tax rate much lower than what’s it has been set for the rich in previous decades. There have been a variety of responses to Buffett’s piece, some supportive, some not. But today we have a response from the wealthy themselves, and nearly half agree with Buffett’s sentiment. 48 percent of those with several million dollars in assets are willing to pay more taxes for the common good, according to a recently released survey (see the PDF report):